It's finally happened. After months of reading the tea leaves, we have the first clear indication that all is not entirely well in the land of Big Oil in the form of the merger between Halliburton and Baker Hughes.
There are lots of stories right now about the Houston-based companies -- the second- and third-largest oil field service providers in the world, respectively -- and what the merger will mean. For one thing, there will almost certainly be layoffs when these two soon-to-be-former rivals put a ring on it and make everything official. Plus there are already questions about how exactly -- with antitrust laws on the books and Standard Oil in our history -- this deal wouldn't violate antitrust laws.
But the thing that has really grabbed our attention is that after weeks of falling oil prices and rumbling in the industry, this merger is just another tell that the oil industry might be readying itself for hard times -- which is a kind and gentle way of saying that, based on oil prices that make the shale plays that have been driving this whole U.S. oil boom less profitable to drill, they may be bracing for a bust.
It's a fairy tale the folks in the energy industry like to tell -- about how hydraulic fracturing and horizontal drilling made it possible to get oil out of brittle shale formations like the Eagle Ford Shale in South Texas, leading to a shale-fueled Texas oil renaissance at a time when everyone in the industry was convinced the days of real American oil production were long past. Unlike every other oil boom in history from, this was the oil boom that would never go bust, the story went. Even when oil prices started dropping, sinking perilously close to the point where shale oil wells in particular start to become unprofitable, it was hard to find anyone in oil who would even hint that there were signs of trouble on the horizon.
While the energy industry hasn't busted up in the spectacular and disastrous fashion of days of yore, it's only taken a few months of low oil prices to drive the industry into a downturn.
Officially, this merger between Halliburton and Baker Hughes has been in the works for almost a decade, meaning it has absolutely nothing to do with concerns over oil prices and where the oil industry is heading. However, analysts are already noting that this merger may be the first of many "as companies with stronger balance sheets buy those that have seen their value drop precipitously," according to the Associated Press.
In this case, Bloomberg contends that both companies jumped into this thing because they were, at least in part, spooked by low oil prices. There's worry that the low prices will soon make it too expensive for companies to drill, especially in the more-expensive-to-drill shale plays, according to Bloomberg. Both companies rent out rigs and charge through the nose for their expertise in fracking, so less drilling would translate to fewer rigs and less money for Halliburton and Baker Hughes if they stayed separate.
And maybe their motivations have less to do with overall industry nerves, and Halliburton is just working an angle to snatch up undervalued Baker Hughes so that the two can combine and become one of the largest service companies in the industry because they want to be real big. Maybe.
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